Question

What is the effect of a price ceiling on the quantity demanded of the product? What is the effect of a price ceiling on the quantity supplied? Why exactly does a price ceiling cause a shortage?

Short answer

A price ceiling, imposed below the equilibrium price, artificially lowers the product's price, leading to an increase in quantity demanded. However, the lower price reduces producers' profit, decreasing the quantity supplied. Consequently, a price ceiling causes a market shortage as the quantity demanded exceeds the quantity supplied.

Step-by-step solution

Definition of Price Ceiling #

A price ceiling is a government-imposed limit on how high a price can be charged for a particular product. It is set below the market's equilibrium price to make the product more affordable for consumers.

Effects on Quantity Demanded #

When a price ceiling is imposed below the equilibrium price, the price of the product is artificially lowered. Consumers are more likely to buy the product due to the lower price, so the quantity demanded increases. This can be visualized using the demand curve, where a lower price leads to higher quantity demanded.

Effects on Quantity Supplied #

On the other hand, when the price is artificially lowered by the price ceiling, producers are less willing to supply the product as they receive less profit from each unit sold. As a result, the quantity supplied decreases. This can be visualized using the supply curve, where a lower price leads to lower quantity supplied.

Price Ceiling and Shortage #

A price ceiling causes a shortage because the quantity demanded exceeds the quantity supplied. Due to the artificially lowered price, consumers want to buy more of the product, but producers are not willing to supply as much since it is not as profitable for them. The difference between the quantity demanded and the quantity supplied in the market represents the shortage. In summary, a price ceiling has the following effects: 1. Increases the quantity demanded due to the lower price. 2. Decreases the quantity supplied as it is less profitable for producers. 3. Causes a shortage in the market because the quantity demanded exceeds the quantity supplied.